One of the key elements of a person’s profile in determining whether you get a good rate on a home or auto loan (or whether you get approved for a loan at all) , whether you get certain credit card, and at times, whether you get a particular job is determined by your FICO credit scores. Most people know this. But most people come in baffled and don’t understand this score itself, as it seems so “backward”. There are dozens of websites out there that give a general breakdown of this mysterious score but they all fail to give a conceptual understanding of the score itself.

The credit score starts to make sense only once you accept that it is not written for you nor for your benefit. Rather it is written so as to benefit companies that lend and for them to make maximum money off of you. Put more politically correctly, it is created to minimize creditor risk. Hence it’s rife with paradoxes. Let’s examine some examples of this.

Many types of things don’t appear on your credit. Cell phones, rent, water bill, etc. Why? Well you aren’t being lent any money for these things so they aren’t directly applicable to lenders. Now if you don’t pay these things then they show up on your credit (in form of collections) as a lender does care about who you aren’t paying as it could mean you also wouldn’t pay them either. (not to mention adding something to your credit negatively helps the collectors collect on it). And when you pay these debts off they don’t disappear either, creditors don’t want just your present status they care about the long term. And things can legally stay on your credit for 7 years or more.

If you pay your bills on time your score goes up. You are a good risk. The longer you do so the higher your score. Those with the highest credit scores are typically those who have been paying their bills on time for decades (older people). Note that when you pay your bills on time for long periods you are not only low risk but also the creditors make a fortune off of you. For example, on a 30-year fixed you are likely to pay for your home 2-4 times over that 30 years! You get a little “gold star” for paying on time (a good credit score) but the creditors get the real benefit.

Now let’s say you don’t use credit at all, you use cash. Well in all likelihood you have no credit scores or very low scores. Who wants to lend to those who don’t want to borrow? Also those people are likely to pay back the debt quickly and make creditors little profit. The credit score likes to see you have LOTS of open tradelines; a mortgage or two, a car or two, a credit card or two or five or ten etc. And as mentioned you should have them open for a long time and always pay on time. Think of how much money the creditors make off you over the years- gold star for you. This causes the paradox of how to get credit when you’ve never had credit and how to have credit when you never have had it.

Now let’s say you LOVE (or simply have to use) credit. You take credit whenever you can get it. You use it all up as fast as you get it. Well this is risky. It shows you are or at least may be desperate. So your credit score drops. That’s why there is the paradox of when you most need credit it becomes least available to you. We see dozens of people who, having gone through one tragedy or other , use up their credit cards, and then even once tragedy is over they can’t get financing as their cards are “overused”. This type of clients inevitably end up doing debt settlement or going bankrupt as the credit score “punishment” has crippled them from seeking other solutions.

This is just a few examples to help the average consumer “get a feel” for the credit score. Hopefully the next time someone tells you your score you better understand it.